The real estate crunch is far from over
Five weeks ago we attended the Rode 2011 Property Conference held in Johannesburg. The property group’s annual showcase included a presentation by chief executive, Erwin Rode, on prospects for property in uncertain times. The outlook for residential property was particularly bleak, with Rode saying we should brace for as much as a 15% “real” decline in house prices over the next five years... Although average house prices will nudge up by a few percentage points each year your primary asset won’t weather the ravages of inflation.
This gloomy sentiment exhibits regardless which of South Africa’s major house price indices you follow. The mortgage departments of the big banks (Absa, First National Bank and Standard Bank) as well as mortgage originator ooba and property data company Lightstone all publish research that confirms the softer trend. Against this backdrop it is no wonder the financial press is full of stories advocating renting over buying and proclaiming the demise of buy-to-let! For the next couple of years you’ll have to take positive news on the house price front with the proverbial pinch of salt…
A moderate improvement in August
We’ll take the latest announcement from ooba – South Africa’s leading bond originator – as an example. “August 2011 is the fourth consecutive month that we have witnessed an increase in the average purchase price amongst first time buyers, which is encouraging,” says Saul Geffen, CEO of the group. “With rates still standing at a 30-year low, improved affordability has enabled many first time buyers to take the leap.” Geffen’s upbeat tone deflects from the reality: The August oobarometer price index revealed that the average house price rose [just] 0.6% year-on-year to R829 897 from R 825 264.
Over the same period local consumers have battled inflation in the 4% to 5% range, with the result the average house price has actually contracted – in real terms – by around 3.5%! And the only way the market commentators can put a positive spin on the news is by “thin slicing” the data. They drill down into subsets of the available information until they come up with something the readers would like to hear. Voila! Ooba – and Geffen – can lead their press release with the fantastic 9.2% year-on-year growth in the average price first time homebuyers paid for their homes, to R619 139.
This news shouldn’t come as too much of a surprise given first time buyers typically transact in the most buoyant sector of the housing market. Absa’s House Price index, which reports house price inflation across a number of size-based categories, has for some time confirmed that affordable homes in the small and midsize categories weather economic downturns better than larger homes.
Status quo for mortgage activity
Property economists can look at a range of economic data to build a picture for house price prospects. One of these datasets is the bank decline ratio – the number of mortgage applications declined by the banks. Ooba says that the year-on-year average bank decline ratio remained unchanged at 46.1% in August, while the ratio of applications declined by one lender but granted by another has declined to just 22.7%. The effective approval rate now stands at 64.4%. “Homebuyers are assured a higher probability of an approved loan if they apply to more than one bank,” says Geffen. He confirms that one in five rejected applications is approved when passed on to alternative lenders.
The slowdown in residential property transactions is not unexpected given the stringent deposit regime enforced by banks. It seems new buyers who succeed in obtaining mortgage finance are coughing up 19.1% of the purchase price on average. And that works out to R158, 125 for the “average” house!
No joy from Reserve Bank leading indicator
Another indicator economists frequently draw from is the SA Reserve Bank Leading Business Cycle indictor which is headed south once again. It showed a 0.9% month-on-month decline in July, and the three-month moving average has also dipped below zero. According to John Loos, property economies at FNB Home Loans, South Africa’s indicator is slowing in line with our major trading partner economies. What does this mean for house prices?
Loos explains: “The direction of mortgage loans granted broadly tracks the direction of the leading indicator – which presently points to ongoing weakness in mortgage market growth!” Against a backdrop of slow economic growth and poor performance from household disposable income we shouldn’t expect positive growth in new mortgage loans in the near term. And that puts extra pressure on house prices...
Editor’s thoughts: One of the traps we fall into when considering investment performances is to review our portfolios too frequently. We look at stock prices every day and worry about retirement portfolio values on a monthly or weekly basis. The return on a house – for those who consider it an investment – accrues over the long-term. Would you agree that we review our investment performances too frequently? Please add your comment below, or send it to [email protected]
Comments